The Compound and Friends - Stock Shortage

Episode Date: February 7, 2025

On episode 177 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by David Giroux of T. Rowe Price to discuss: David's outlook for stocks, the Barron's Roundtable, the opportunity in fixed income, earnings season, what it's like managing an ETF, and much more! This episode is sponsored by Themes ETFs. To learn more about their ETF offerings, visit: https://themesetfs.com/ Sign up for The Compound Newsletter and never miss out!: https://www.thecompoundnews.com/subscribe Instagram: https://instagram.com/thecompoundnews Twitter: https://twitter.com/thecompoundnews LinkedIn: https://www.linkedin.com/company/the-compound-media/ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

I'm not normally dressed this way. Do you have any rooting interest in the game? I do not. Okay. Are you not a sports fan or are you just not an Eagles or Chiefs fan? I spend... don't have a lot of time for sports. Good for you. But I would probably be rooting for the Eagles against the Chiefs. You would?

Just because. Geographically? Just because what? Well first of all we have an operation in Philadelphia. Okay. And they're great goal and those are good guys on our high yield side. They were all rooting for the Eagles. There are no good guys Eagles fans.

I'm sorry. This is so exciting. So I have a lot of stuff in the doc about T. Rowe price in general. Sure. Which I think it's a great story. One of the longest-lived asset management firms in America. Yeah. Okay. And, oh, go ahead.

Our best and worst guests don't bring a computer, so. We'll let you know how you did after the show. Yeah, yeah. David's going to kill it. David, you're a Tiro lifer? I am. Are there many like you? There are.

Yeah, there are some who've only worked at Tiro. That's the sign of a good company. There's like a few in financial services that the average 10 years just like forever. Yeah, yeah. That's the kind of place that you want to be. You like the people, you like the atmosphere, like the culture and no reason to leave. That's more rare these days though, I feel like. I think that's fair. That's fair.

And you do the Barron's roundtable what was your first year on the roundtable oh boy I think either 22 and 21 2021 yeah okay did they do that one remotely they did that one remotely yeah I remember that that era a lot of things that used to be in person were remote for that year yes that's right that's right But I think it was important. You want to get it done. You want to not skip a year. You want the continuity.

Yeah. We're still doing this. And then they moved to like a half year format. So now they do the six month update. Yeah, the six month update is not in person though. So we just do that remotely. So can you tell me a little bit about what that's like behind the scenes? Because I've been reading Barron's since 1998.

So I've always been curious. Everybody gets together in a ballroom somewhere. There's photographers. A lot of picture taking. Okay. There are so many of you though. How do you get through all of the content? It is a long day. Is it all one day?

It starts at 8 and we kind of end the dinner at nine. Wow. So it is a long day with a lot of photos in the way in the middle. Now does Mario prolong it or does he like keep his comments a little bit shorter? No, he's fair. He's fair. Okay. All right. I've done TV with Mario. Is he the longest tenured? He is the longest tenured. Night at the Round Baron table? He is and Scott came on right after Mario. Scott Black. Yeah.

Yeah, he's great. I think, I think they're all great and Abby's great. Yeah. So Michael and I were talking about this on a recent podcast though. It's really hard because you're coming up with these picks in mid December. Yeah. And then the world changes, not just in one year, but in any year, and you guys don't have the opportunity to like log back in and make any changes

to what you were doing. So you kind of like, if you like a stock in December, that's what you're riding for the year. Yeah, we do it, so we usually do like the first week of January. So depending, so the first week out, you get one third of the recommendations. So this week, this time I was the third.

So once, I mean, I think we had Riveti in it, like 103, or 113, it was 120 when the public sees. So there's a lag effect. Basically like, I don't know, probably three weeks essentially between. Yeah, but you have to live with that till December. That's fine. It is? That's fine. Okay, I you have to live with that like till December. That's fine. That's fine. That's fine.

Okay. I guess I guess we're not we're not we're not. You're not rapidly changing your portfolio anyway in real life. So that's that's the reality that you live with to begin with. Absolutely. Okay. Are there certain types of investment strategies that that approach? Obviously short term trading, but like certain types of investments that you wouldn't bring to the roundtable that you would own in a fund just because you know you might have to make a decision to get out of it before a year is up?

Well, I think, well first of all, I think we would, you never know what's going to happen. There are situations where like, you know, you recommend GE one year and it goes nowhere then it goes up a ton. So I think you have flexibility. I never know which of my names is gonna work and which of it is not gonna work. I mean, it's just- Yeah, they ask for your best idea.

It's your best idea. But I guess what I'm asking is you might have an idea that you think is your best idea, but you don't wanna be married to it for the full year because something might change. Whereas something else you're like, is a pretty low bet that I'm gonna get out of this. Let's use this stock.

No, no, we really, as a team, I have a team of three APMs, and we talk about it as a team, and we're our highest conviction ideas, and let's share those with the group. I think it's great. David, you know what we call the show? We call it TCAF. Oh, okay, okay we call the show? We call it TCAAF. Oh, okay, okay.

Yeah, that's the other thing. I wanted to talk to you about copyright infringement. When did you launch your TCAAF ETF? I think we were first. We might be. Oh my gosh. We're all friends in this room, Tom. Oh, I didn't even think about that. Yeah.

When did you launch those, sirs? We're going to talk about it later. June of 23. Oh, you're definitely going to be in litigation. Okay. We started the podcast in 21. When did it come to our attention that there was a TCaf ETF?

Graham brought it to me like two years ago. I guess when you launched it. Well, listen, when you do well, we take credit for it. So, it's all good. And when you don't, we disown it. Alright, we ready to go? This is an important man sitting across from us. The claps are coming in.

Whoa, whoa, whoa. Stop the clock. Here's a word from our sponsor. Today's show is brought to you by Themes ETFs. Themes ETFs seek to provide a way to own the opportunities that are shaping the future and moving markets, with expense ratios 40% lower than the average charged by competitors. The current offering at Themes ETFs spans both cutting-edge technologies and traditional industries with targeted exposure to single-stock, leveraged ETFs. Specific ETFs include WISE, which is their generative AI ETF, Uranium, and GSIB, that's global systemically important

banks. To learn more and access important risk disclosures, visit themsetf.com Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

177, ladies and gentlemen, welcome to the compound and friends. Welcome to all the first time listeners. We appreciate you. You just discovered the show. This is America's very best investing and financial podcast. My name is Downtown Josh Brown with me as always, my co-host, Michael Batnick. Michael, say hello to the folks. Hello, hello.

All right. And we have a, we have a full house here today. Daniel's here, Duncan, John, Nicole is here. How you guys feeling? Feeling good? Feeling good. Podcasting is an audio medium. How are you feeling, Duncan? Feeling great. All right. The nodding doesn't really help most of the viewers. All right. And we have a very special guest, first time appearance here on The Compound of Friends staring at

me bewildered. What in God's name did I say yes to? His name is David Gero and David is a portfolio manager for the capital appreciation strategy including the capital appreciation fund and the capital appreciation ETF equity ETF and co portfolio manager for the capital appreciation and income fund at Tiro price investment management David welcome to the firm thanks Thanks for having me. I'm going to tell you some other things about yourself. You are also the head of investment strategy and the chief investment officer for T. Rowe Price Investment Management. So that's like an umbrella title. You're the guy. I guess so. Okay. Um, six time nominee,

two time winner of Morningstar's outstanding portfolio manager of the year award in your category, which is moderate allocation. And your fund has won 22 best fund awards from Lipper. Quite a quite a resume, sir. Thank you. I appreciate it. Which of those are you most proud of? The Lipper, the Morningstar? Like what do you I know you don't do it for like to win awards, but what were you the most excited about? I don't know, I don't know. I think the Lippert Awards, the quantity is, the consistency.

The amount. The amount, yeah, absolutely. Is there anyone else that is always in the running for the same thing and you keep eating them or does the category change a lot? I think there's about 100 funds in the strategy and it's just basically who has the best performing in three, five, or 10 year periods.

Oh, it's not subjective. You can't take somebody out to lunch or anything. I don't think so. Okay. But you're crushing the field. That's 22 years? That's Brady-esque. Who would you say is your biggest rival?

Name names. I don't think we have a rival that I'm aware of. Not like a direct head to head rival. Yes you do. S&P. That's true. That's true. Okay. I want to ask you a little bit about T. Rowe Price because you've been there for a long time. When did you start? 98. 98. Okay. T. Rowe Price has been around since the 1930s and it's one of these fun companies that came along in the wake of the Depression and the crash of 29. A lot of people don't know this.

Prior to the crash of 29, the predominant vehicle for stock ownership was the closed-end fund. The problem is they were all levered. And they all went away. And the only funds that survived by and large were the open-end mutual funds that were not using leverage. I think MFS was one of the early ones. I think Fidelity was around then or okay. I'm not sure.

I'm not sure about that when Fidelity was around. All right. But T. Rowe Price, so you guys are almost 100 years old and also one of the largest publicly traded asset management firms. I think you're the sixth largest and 1.61 trillion in assets under management. So, from the inside, what is special about T. Rowe? Why have you stayed there your whole career? What do you like about it? Well, I think the culture is, it's a culture of, it's a culture that really puts investing

focus. We don't have an insurance business. We don't have an insurance business, we don't have a bank. We all go to work focused on investment management every day. You know, when I started in 1998, there were a lot of investors who were very, very long-term focused.

And that was kind of how it worked. When we went to meet with management teams or I was an industrialist, and as auto analyst, a lot of long-term questions. And you know, in the last 26 years, the market has really changed dramatically an auto analyst, a lot of long-term questions. And in the last 26 years, the market has really changed dramatically because of passive taking a lot of share, put active under a lot of pressure.

And really as a result of that, and hedge funds become a much larger part of the market, it is very, very few people who are kind of doing good long-term fundamental research like T. Rowe Price anymore. And that just wasn't true 26 years ago. It's more like quantitative these days, and index-like construction of portfolios, less shoe leather analysis.

Some quantitative or some really short-term, right? It's like, what's the quarter gonna be? Is it three or 4% organic growth, right? And I'm gonna make a big bet on what outcome based on some credit card data I have or some very, very short-term focus. And actually, I would argue a lot of the industry's intellectual capital has been focused on trying to fix,

solve that really, really hard thing to fix really, to really get edge on. And so that area of longer-term investing, thinking out three, five, 10 years, it's really, there's not a lot of competition. What's going to raise AUM this quarter? Is the new question that people are, not new, the question that people are most preoccupied by.

I think that's fair. Do you still feel like you're setting prices as the active manager? Yeah, we are setting, we still are saying, but it's not in every circumstance anymore. You do see situations where there's a lot of volume on a specific ETF. You see the correlation between those names

and that ETF really rise dramatically. I always remember a great story. In 2016, Hillary Clinton was tweeting about high drug prices. And there was a single, it was an index that covered all drug companies. Well, inside that drug index was something called Zoetis. Zoetis obviously makes- Animal health.

Animal health, thank you. And the stock went down almost as much as everybody else. She wasn't tweeting about the price for cow. It was in the index because it was spun out of Pfizer. Exactly, very good, very good. And they didn't have a chance to remove it yet and put it in the, I don't know, where would you put it? No, it's still in the index.

It's still a pharmacy. But it got treated like it's doing diabetes medicine. Right, okay. Exactly, so you do see situations where, or there's a time where when Trump got elected and when real estate was still within financials, the real estate, which he actually should have done poorly when Trump came elected and when real estate was still within financials, the real estate which actually should have done poorly when Trump came into office in 17, you know, it went up just like all

the other financials. So we have lots of volume correlations in those sectors. Those ETFs can get pretty high. But it sounds like it's at an obvious edge though too. For somebody that is not an indexer and somebody that's making decisions, it's like, oh look, the index money has this wrong today. Yeah. Let's capitalize. Do you think like it's taking longer for value to accrue to names that you find value in?

Are there examples of, we've held this for three years, and my God, it's still undervalued. The market participants are not seeing the value that we are? Or you're not concerned so much with that? We don't see that very much. I mean, again, what we're talking about is more like a short-term kind of event, right, a week, a month here. Yeah, the reality is if you can find companies

that are creating value at a healthy rate from earnings or cash flow. Price will follow. The price will follow. It's just, not in every case, there's some companies that we own that we were a little surprised at where they're trading even after the last couple of years. But I always talk about GE, it was a GE company

that really went nowhere for like three years and it went up 4X in two years, right? So it's, you just never know when those inflection points are gonna be sometimes, you just gotta be patient. You know what seems really hard to me and to Michael, we talk about this a lot, even if you nail the earnings, you don't know the sentiment piece

that's gonna decide what the multiple will be. And some of the companies I think about often in this framework are like the auto manufacturer. So for every year of my career, I'm in the business 25 years, for every year of my career, the P E multiple has gone down basically one point. And now there's six. But when I started in the business, they one point. And now they're six.

But when I started in the business, they were 20. Like in a good year. And that's when Chrysler was DCX, Daimler, Chrysler. So like you can get the earnings right in those companies year after year, but no one's gonna tell you, we used to value these things at a market multiple 16 to 20 and now they're gonna be six. On the way to, I don't know, one times earnings.

So how do you know? Because when you say like if you get the fundamentals right, eventually the value will accrue. Sometimes no though. Well, think about what causes a company's multiples to compress dramatically over time. Margins? It can be margins. Disrupt, disruption risk. Disruption risk. the growth rate slowing,

increased competition, poor cap allocation. So they have all of those things. Yeah, you would have all, yeah, all those things, or multiple of those things kind of drive multiples lower. If you have a company that doesn't have any of those things, the odds that you'll wake up in five years and the multiples five points lower tend to be pretty low. So just try to, again, I always think about my job. My job is,

is thinking about earnings power five years out and think about where, where is that multiple likely to go? Why is the multiple, multiples go higher when organic growth gets higher, cash encouragements gets better, management gets better. You know, you want the double way in many cases of multiple expansion plus kind of nice earnings growth. Some of our big winners, the thermo fishers of the world, the riveties of the world, Marks McLennan that had that, we bought them at 12 or 13 times, they compounded earnings at a 12, 13 cent clip, but then also they're multiple. And got rerated.

And they got rerated. And that's where you turn, that's where you generate kind of high teens kind of returns. So I wanted to ask you about your category in particular Your your fund is in the moderate allocation category TRO is about 42% individual investors 58% Institutional investors to both of those groups utilize a moderate allocation fund in the same way What's like the what's the pitch to somebody allocating a portfolio,

why they should include the capital appreciation strategy that you manage? Well, I think the easy, the pitch would be over time, we've added alpha both on the equity side and the fixed income side. And that, we're not a static. So moderate allocation is both? Yeah, or I'm sorry, moderate allocation would be

usually a 60-40 allocation to equities and 40% of fixed income. Okay, so that's your universe, that's your world. You think about it, there's ranges, let's call it 50 to 70, right? Some of the more conservative would be more like 30 to 50. So I would say the argument would be, hey, we've added alpha over time on the equity side, added alpha on the fixed income side, and we don't also have a static portfolio. When equities get really cheap, like they did during COVID, or during the end of 18, or during 2011,

we can increase the equity weight and reduce the fixed income weight. So you have three ways you can beat, your stocks can beat the stock market, your bonds can beat the bond market, and you can beat the 60-40 by going 70-30, 80-20. Offer two times. At the right moment. Yeah. Okay. All right. It's a great way of thinking about it. Speaking of alpha,

this comes from T. Rowe Price's own literature. We'll assume the data is accurate. John, why don't you throw that up? So I thought this was an interesting way of viewing this and you can see it's disclaimer to completely wrapped in bubble wrap and of course that will all make the show as well, we will read that entire disclaimer later. It's almost Talmudic. We have a lot of lawyers at T. Reprise. Okay, but the big picture is, with a disclaimer guys,

this says more return than comparable passive funds across more periods. This looks at 10 year periods rolled monthly over the last 20 years and did June 2024. Tiro Price has outperformed passive in those 10 year periods by, has outperformed 70% of, not passive, 70% of peer funds. And then it's beaten passive. What's this other one saying? Average additional return over passive peer funds across all periods analyzed, 0.83%.

I guess that speaks to the research process at T-Row, the longer term focus. What else is in that secret sauce that enables you guys to be able to do that? It's pretty impressive. Yeah, I think it's focus. It's having a little bit, we're doing something different than everybody else, right? We're not the game of trying to call the quarter. We're not trying to decide if organic growth is going to be three and a half or four. We're not the game of trying to call the quarter. We're not trying to decide if organic growth is gonna be three and a half or four. We're not shorting stocks.

Our focus for the most part is trying to find companies that we think can compound wealth over time, whether it be a value stock, a growth stock, or something in between like a Garpy stock. And to find things we think there's a high probability that can beat the market. Again, I think what T-Rail would be known for would be, you know, companies that tend to have good management teams,

good capital allocation, maybe a little bit of lower earnings volatility relative to the market. And we take bets. I think one of the problems with passive managers, or active managers in general, I think, and one of the reasons why passive takes so much share over time is a lot of people don't take bets.

It's really hard to beat the peers and overcome your fee structure if you're not making bets. I make bets, most of the people in T. Rowe Price makes bets, and that's the only way that statistic that you're right is. Part of making bets, though, is you need a corporate culture that's forgiving when the bets don't pay off.

Yeah. And when you say people don't make bets with good reason, if you make bets and the bets are wrong, you're looking for a new job. So you need a corporate culture that allows you to make a mistake or have the wrong waiting or something. Like that's definitely critical. Exactly, and I think what you have to, is there a process error or is it just some kind of,

do you make a process error or was it just, hey, you know, it's a gumball machine, there's seven red balls and there's six blue balls and a blue ball unfortunately came out, right? Or did you make it some kind of structure? We spent a lot of time on process versus kind of. So research flood or just a bad outcome. Exactly.

Yeah, that makes it, it doesn't make a difference to the end investor, but it does make a difference internally on an IC where you're all trying to get better at your jobs. Absolutely. And you guys are making bets, we'll get to this later, but like you are 13% underweight information technology,

6% underweight communication services, and those have been the drivers of returns for the past couple of years. So you guys are not shy about having conviction. I will say, I think that we are actually, again, sometimes because we are a balanced strategy, sometimes those numbers might be skewed by our fixed income exposure. So I apologize for that.

So what you would find today is we are moderately overweight information technology, but you would see a very large underweight to financials. Financials have rallied dramatically, traded- Still rallying, yeah. Traded very high valuations. And we were buying Goldman Sachs a little more than tangible book value.

Goldman Sachs ain't selling for that anymore. At two times the tangible book value, it doesn't look that good to us, right? All right, we're gonna do some stocks later. I wanna start with, I don't wanna bury the lead. So I read the Bounds Roundtable and there were several people on there that are not bullish at the moment and you're one of them. And I don't know, what did you pick out from the stuff that David was quoted as saying?

I mean, credit to you, it's interesting to see a portfolio manager, long only, asset manager and I mean, I don't want to read what you wrote, but lay out the case why why are you seeing things a little bit less half full coming into the year I'm sorry half empty yeah and did you get any calls from corporate like David what what are you missing you missing the game here we're trying to raise money in stocks no no no no I think I think they let me say what I need to say okay we want it we want to hear Okay, we wanna hear the case directly from the horse's mouth, absolutely. So, one of the mistakes I think a lot of people make is when they talk with the market.

They'll just say, hey, the market's 22 times, right? That's expensive versus history. The mistake I think a lot of people make though is that the market mix has changed dramatically. Back in 2006, when I first started managing the cap appreciation strategy, 45% of earnings came from financials, energy, materials. Wow.

Very low multiple sectors. Right. 45% of earnings. Today it's like, it's like, not half, but 25%. So not apples to apples. It's not apples to apples. The mix of the markets changed dramatically. Yeah.

So you just can't compare, you know, just like you can't compare the market when their market was driven by railroads, you know, a long time ago or auto companies. It's ludicrous. You have to compare Apple. And so the way we look at it, we kind of divide the market up into different buckets, right? Traditional growth stocks, about 44% of the SBI of 100,

you know, they're trading about 32 times earnings versus historical 29 times earnings. So a little expensive, but not crazy. Because you're comparing growth stocks to growth stocks. To growth, exactly, exactly. Over a reasonable period of time. But you know, heavy cyclical companies, like companies that will have earnings down

20% in recession, banks, maybe some asset managers, you know, regional banks, they're trading about 17 times earnings in the last 10 years is 12 to 13 times. What are they pricing in? They're pricing in regulation and lower rates. They're pricing in, actually they're pricing in higher rates, stay higher. The economy is great. And that, um, yeah, the banks like higher rates, not lower rates. They do.

They do like people don't understand this and we all have to relearn it every few years. They do. They do like higher rates. I think people don't understand this, and we all have to relearn it every few years. They do. They do like higher rates, and their fundamentals right now are very good, but you're getting kind of close to what we... Net interest margin is basically the difference between what you get on your deposits from the bank and what they loan out. And that NIM, if you will, is getting close to kind of record highs. And so you have a weird situation with the banks you're kind of putting a peak

multiple on peak earnings. Not exactly you get there in 26 but when a bank that historically trades for 9 or 10 times earnings is trading at 13 or 14 times not just 13 to 14 times normal 13 to 14 times a peak. Here's how it is. That's a little scary. Here's how I'd argue with you though. Is JP Morgan a bank or is it an asset manager? Or is it a wealth manager? Or is it a... You know what I mean? It's a bank. Because you talk about Apple's and I understand it's a bank, but I'm saying, did the banks have these businesses and were these businesses as profitable two and three generations ago

when they were 12 times? You're saying they... It's a very good question But I would argue even go back five or six years. This is not I Think anytime there's something that someone throws out a number It's really important to think about the context around there and I think your points are good But you know JP Morgan had the Treasury management business back in 06. It had asset management back in 06 I think it's much bigger now though

I know I would I you know they I think they historically much bigger now though. I think they historically generate about half of their profits from kind of net interest income and about half the profits. I'm not sure it's dramatically different. I mean they've grown loans a lot faster so that's kind of driven that net interest income. Well their dominant position in the market is a lot different. I guess like 15 years ago Bank of America didn't own Merrill Lynch. JPMorgan hadn't gone as far in securities wealth management as they are now. I'm not saying they're not banks. I guess maybe what I would think is if ever you were to re-rate

these banks maybe this would be the time because of how far they've gotten into some of these other businesses. Well, I think the business that actually, for JP Morgan, has become much bigger for So6 as the investment bank. Yeah. And again, that tends to be a lower multiple business over time. Because they've taken a share. They've taken a share. They've done a good job. I mean, JP Morgan is the best-run bank in this country, but it's still a bank. Still a bank. Still a bank. A lot of volatility, peak earnings,

peak net interest margins. So we're drifting. Why not bullish? What else do you see in front of you? Well, can I, let me, let me quote you, all right? And then you can react to your own words. You said, I don't, this is what grabbed our attention. I don't mean to start this conversation on a down note,

but we are probably as negative about the S&P 500 as we have been in a long time. Based on our company by company analysis of where stocks will trade by 2030, our five year forward total return estimate for the S&P 500 is less than 5% a year. You go on to point out that the market's 22 times, 25 estimated earnings, 26 times free cash flow, and then you're breaking down the components of the index, and you're seeing a lot more expensive stocks than I guess others might be. Yeah, I think everybody kind of acknowledges the market's expensive. I think it's just, what's really interesting is like, I think we think about what's going

on right now. Yeah. And what you think about, just think about's really interesting is like, I think we think about what's going on right now. And what you think about, just think about the last five or six years, just because things feel good today, they may feel horrible in a year. Oh, sure. Think about- The switch flips real fast too. And so the market is a lot of extrapolators, I like to say.

And if you're extrapolating things feel good today, they're always gonna feel good. During COVID, they're gonna feel bad, they're always gonna feel bad, right? And it's just, the future is far more uncertain than the market and most market participants understand. And so when you're paying a high multiple for things feeling good today,

you shouldn't be convinced that things are gonna feel good in a year or two years in the future. I mean, at the end of 17, everybody felt like great with economy. We had taxes coming, market was down in 18, right? And at the end of 18, we thought we were gonna go into recession. And then people thought, yeah, we're going into recession.

Oh no, 19, no recession. 19 was a big year, market was like 29, 30%, right? And it was great. Ah, COVID, right? World's gonna end, oh, market's up 15%. Growth's gonna take over the world in the end of 21, growth's dead at the end of 22, not growth back longer.

It's just, if you just, if you think about if you put all your eggs in the basket of like, I'm going to bet on what's working right now, systematically, that kind of momentum stride, that's a money to lose. It's a very human trait. There's a great George Orwell quote that comes to mind. And it's about politics. But if you just close your eyes and think about this as an investor it's almost too perfect. He said power worship blurs political judgment because it leads almost unavoidably to the

belief that present trends will continue. Whoever is winning at the moment will always seem to be invincible and if the Japanese have conquered South Asia they'll keep South Asia forever. If the Germans capture Tobruk infallibly they'll get Cairo. The Russians are in Berlin, not long till they're in London. This habit of mine leads also to the belief that things will happen more quickly, completely and catastrophically than they ever do in practice. That quote came to mind this week in a political context.

It looks like Elon is very rapidly running through government until he basically pulls every lever. But if you think about that from an investing standpoint, right at this moment, it feels like to be out of stocks, especially be out of growth stocks, it's like, what are you looking at? What are you even paying attention to? How could you be out?

And it always feels that way in those moments where it's about to change. And that's why I think that's why we're not trying to predict where a SaaS is going to be today or tomorrow or next week. We have no edge at all. But you're talking about a five year forward total return estimate of less than 5%.

How do you calculate that? We literally go through the top 100 companies in the, plus another 50 companies that we model as a team already because we own the stocks. And then we do a couple sectors that are more a little bit easier, like staples or utilities or energy based on our energy price assumptions. And we basically build models out for all those areas, the sector or the company. We look at, you know, earnings 25 through 30. We look at what the right multiple was going to be for that company based on history, based on where we think the growth rate is going to be, where we think the free cash conversion is going

to be. And we add it all up essentially, and you kind of get a price target for the market at the end of the decade. Yeah, about $7,200, $7,300, which is not too far away from where we are today. And again, when we were doing that analysis in the summer of 2022, when everybody was kind of, the economy is definitely going to go into recession, every celebrity CEO was calling for recession. You know, that, that, that kind of analysis was spit out like a 1230s and kind of return. What could make you wrong about that return assumption, AI being more profitable for the rest of the market, or or oil oil prices sustainably lower

because of something the Trump administration does to create more supply corporate taxes corporate tax rates going into the teens like what what would make you say you know what I don't think it's five percent a year anymore I actually think things have changed and maybe it's seven percent a year I mean I think that either there'd be a number of things. Let's say our AI assumption for 30 is, for GPUs instead of 300 billion is 600 billion, right? Okay. That moves the needle on a company.

So that would be, if I said the market that is gonna be 120 billion this year goes to $600 billion, that would move the needle. That would, that would, that would, If you said the market is gonna be 120 billion this year, goes to $600 billion, that would move the needle. That would, if the productivity from AI is so massive, to your point, that it drives unemployment from four to seven, but it drives margins for companies dramatically higher in substituting labor for software or software

for labor. Yeah, that could be positive. Well, you have a name in your portfolio that most people are not thinking of as an AI name, but it's an automation name. And the AI and automation themes are going to merge. Physical AI will be the buzzword of, I think, the next half of the decade. Rockwell automation. I own some robotics related stuff.

There is a universe though, where this AI fever spreads to like actual corporate profits and people are like, hey, remember all that investing we did in GPUs and cloud compute? Well, here's what it turned into, we're beating earnings on a regular basis now by 5, 10%. Structurally, you could see where you would say, oh, maybe people weren't too bullish at the end of 2024.

Maybe that made more sense than we thought. Well, I think what's interesting to me is if you think about the areas, the area we've kind of, we know AI works. We know AI works in a incredible- Speak for yourself. We know where it. It's incredible. Speak for yourself. We know where it works is like a GitHub co-pilot, where essentially you were replacing a computer programmer

for $19 a month, or 50% of a computer programmer. The ROI on that is off the charts. And so what you would say is there are sectors, which were overweight by the way, where you'd say they have a lot of programmers, where their margins could be, and maybe we'll already are starting to show some signs that that's actually a positive. Software companies have the largest amount of their revenue or their cost structure potentially to be

positively impacted by AI. Not only do they potentially have revenue growth acceleration as they introduce AI products and make their customer productive and get paid compensated for that, but their cost structure could go lower over time as the cost of programming or programming goes lower as well. Do you think that's behind the software rally of the fourth quarter of last year is people saying no matter how many chips people buy, the cost of running a software company

is going to trend lower because of ubiquitous AI? I don't think it is. I think honestly, there was just a sense that first, sometimes in any sector where there's one dominant theme, people just chase that dominant theme and they get left a lot of things. A lot of really good companies get left behind. And software companies just got left behind,

and by the end of the year, people are like, oh, these guys aren't going to be killed by AI. Maybe they'll be a benefit. Because that was also the time you saw Salesforce saying, hey, ServiceNow, Salesforce, these stocks started ripping. We had a gentic AI potential. Maybe we're not a loser. Maybe we're actually a beneficiary of this stuff.

So I think that was kind of what drove some of the rallying Q4. So David, if you are forecasting 5% returns for stocks in the next couple of years, surely you must be more optimistic on bonds which are offering nearly the same rate at a third of the volatility? Yeah, actually much less volatility. I think the only challenge, I wish it was that easy, unfortunately, spreads are tight. So if you think about a bond, and you go on a 10 year bond, and the spreads are 100 and they go to 200 bips because there's, they revert to normal or there's an economic downturn,

the bond prices can go down all else equal. So spreads are very tight in leverage loans, they're tight in high yield, investment grade, the ag. So yes, you have less risk, but it's not like you have no risk, right? You have double the risk, because you're running both. And if the reason they start to sell both asset classes off

again is because the Fed is not cutting rates, or oh my God, they might have to hike rates. Like, you're not getting that safety on the bond side, because we lived through that in 22 and nobody wants to relive that. The one thing that we do have, and again a lot of our peers don't for some reason, is leveraged loans.

Leveraged loans are top of the capital structure, floating rate in nature debt, and they did really well in 2022. They did really well in 2020. Because credit did really well. Well, credit did well, but also they are, they benefited higher rates. They're the one thing in fixed income,

when rates go higher, it's floating rates. Exactly. Yeah. So you get, you know, if rates go from, let's just say rates go from. How are you getting your loans exposure? You're not buying an ETF. No, we're buying loans.

You're like out in the market buying loans. Yeah. As part of your fixed income. There's a trillion dollar term loan B, there's loan market that we invest in. So David, I don't know about your mandate, but T-Row has been involved in privately traded equities, privately traded companies in the past.

Where do you stand on private credit, which is an exploding category? It is. I mean, that seems like a decent fit for your strategy. I mean, I guess the issue is, I think no one really knows what they own in private credit. I don't think the investors in private credit know what they own.

I mean, really what you tend to own in private credit, you are buying a eight times levered, maybe a mid-market kind of company with maybe a little more volatility in your EBITDA, and you're hoping that it turns out okay. These are not household names, these are not companies that any of us would know. No, no, no, if it doesn't turn out okay, you just negotiate.

You just keep kicking the can, it's fine. Well, that's actually been, unfortunately that's been part of the game. Unfortunately that's part of the game that's actually been, unfortunately that's been part of the game. Unfortunately that's part of the game. I know, I'm waiting for that part of the game to not work out as well as it has so far. So far it's been fine. But these are top of the stack as well.

They are top of the stack, but again, if you're levered eight times and you have an asset that's worth 10 times, you even dollar falls 40%, your fixed income is kind of underwater, right? Very, very easily. Yeah. So you gotta make sure that you're,

and also the other thing about private credit is what we're seeing is that in 21 and 22 and 23, the traditional leverage loan market kind of pulled back from the market. So credits that should have gone to the term loan B market went to the private credit market and you're seeing repricings there. B market, went to the private credit market, and you're seeing re-pricings there. So, some of these guys in private credit were getting

S plus or SOFR plus 600, 650, 700. What is it now, 400? Yeah, you see it, yeah. Or some of us actually just get refinancing to our market at SOFR plus 350. There's too much money chasing too few companies. In private credit, absolutely. What do you make of the argument though?

Um, that it's nothing really to worry about because these are like some of the best investors in the world. And if they're doing a direct lend to a company, they can make sure it turns out. Okay. They can renegotiate terms. They can extend. They can, uh, like as opposed to a whole class of bond investors where it ends up, goes to court,

and then everyone loses something. That part resonates with me. What about you? I would argue that again, these businesses are smaller, less stable, more levered. You know, if you're liberty, if you're- We make metal fasteners in Wisconsin. No, wait, but it depends on the size.

If this is a $250 million EBITDA business, that's not nothing. A lot of them are smaller than that. A lot of them are smaller than that. You're talking about a lot of $100 million EBITDA businesses. And again, eight times levered. I mean, if you're eight times levered and your cost of debt is 11%,

I mean, that's a lot. That's a high hurdle to get over. That is not a great company. That is not a good. Yeah, you wouldn't borrow at that level if you didn't have to. No, if you think about the companies we own in the leverage alone land,

insurance brokerage companies, software companies, a lot of business services companies with a billion dollar, even dollars in some cases, where you have true 20 times enterprise value and you have six times leverage. And they're actually generating free cash flow. So getting back to your 5% target, have we ever had a 5% five-year period in equities without a bear market? Probably not.

Well, it's a good question. I haven't thought about that. Let's just assume that's true. Like, well, you don't have a lot of single digit gain periods at all. That's true. You have a lost decade that we can all recall because it's in recent memory. That's two bear markets, both 50% bear markets. One ends in 02, the other one ends in 09.

That's all within a seven year span of time, give or take. And even that's not a, it's a zero percent return for the S&P over that decade. But to Michael's point, like, we don't typically get rallies in the stock market that are five percent. Doesn't happen. So like, it's more like 10, 10, 20, negative 18. Like that would maybe be how you get to like a single digit.

I mean, that's very, very possible. I mean, I just, I go back to the point that you could think about the end of... The end of... Titanic, the movie. Thank you. That's a great film. Why wasn't there room on the thing for him to climb out of the water? I think they've tried. I think they've done tests on that. Couldn't he go on her

back? Wouldn't have floated? This is just physics. Oh sorry, you just float here and I got the plank. I don't know. No, I understand. It's like a movie. It's very romantic. Yeah. Very, very, so. Romantic, very romantic. Yeah. Very, very, very, but. I still love you, Jack. Wait, can we do his, put his chart up while he's answering this question? This is your current asset allocation, yeah?

Chart three. Is this you? Yeah, it looks like me. Okay, so you're 59 and a half percent US stock. And then I guess US bonds, that's treasuries, the dark blue? It says US bonds. US bonds. Yeah, that's not just treasuries.

Not just treasuries, it could be corporates too in there. I think that would be loans too. Okay. And how much could this fluctuate? Like in a pandemic, like this could go from 59% to 69%? Yeah, I mean, I think- Equities? We put during the COVID market decline

and kind of end of February to March, we put $9.5 billion to work in a month. Oh, that's awesome. Yeah, that was, you know- Did you have inflows or outflows in March, April? We had $400 million outflows and we put nine outflows. Because we started, we came into the core. See that's, when you have like that allocation

to cash fixed income, you can do that. We had 15% of the portfolio in cash in treasuries and we took out, sold some treasuries and we bought cyclicals. It's killer. And that worked out well. Okay. How closely do you follow your company's earnings?

I listen to every single call. Every single call we listen to their earnings, we do a follow-up call with the management team, we rewrite, underwrite our five-year IRRs. So I'll do 135 of those this quarter. You talk to sell-side analysts who are participants in those Q&As? Yeah, we do.

You well talk to them. Yeah. Okay. But you're gonna listen to the call too. You're not gonna rely on just sell side research on your names. Oh, no, no. You guys are on everything.

Yeah, I mean, my job, even though I'm a portfolio manager, is I'm the guy in charge of building the five year IRRs for the utility space. Yeah. So, you know, we all, all the members of the team have, we're all, our real job is being analysts. You know what I always wondered? How come most of the questions asked on conference calls

are from the sell side and really only mid and small cap do you hear buy side? And that's only because there aren't any analysts covering them anymore. Yeah, it's funny. Have you ever wondered that? You know, when I was a young analyst covering industrials, no one told me that.

So I used to get on conference calls all the time and ask questions. You could probably go back to- Press two and just start talking. I would, I would, I would. No one told me that. So I used to get on conference calls all the time and ask questions. You could probably go back to- Press two and just start talking. I would, I would, I would. I did that all the time. And then someone came and said, no one does it, Dave.

What are you doing? So- Do you ask questions now? No, I don't ask questions now. Okay. He's too big for that. Okay. I don't want to give away what we're thinking.

Well, that was, so that was my, so we're going to go there later when we talk about active ETFs versus- Yeah. But we'll talk about that later. But to Michael's point, we have a chart, price reaction to beats misses. I think we're two thirds of the way through

earning season, give or take, right? So nothing particularly interesting on the miss side, but stocks that are beating their EPS are not getting rewarded. So I don't know what the average is, but on average they the rising three basis points Which is nothing compared to the 1.16 the prior quarter 1.4 the quarter before that So missus are getting punished as they normally do but beats are not getting rewarded which speaks to the fact that yeah valuations are rich Maybe maybe we could use a pause here. Just I think expectations are high. Yeah, and so

That would be why that would happen. Yep, exactly Okay, I want to throw up another chart. This is not earnings so, again, it's like- That would be why that would happen. Yep, exactly. Okay. I want to throw up another chart. This is not earnings per se, but I thought it was really interesting. This is from Ed Klesseldt, an analyst at Ned Davis Research. He shows the percentage of profits from operations

for the S&P, the 500, the 400, and the 600. So the large, the mid, and the small. And he says a reminder that small caps get about the same percent of profits from overseas as large caps, not the domestic safe haven they used to be. And I saw this and I was like, whoa, whoa, what? Nobody knows that, I don't know that.

Because we always talk about how the smaller companies are more levered to domestic policies and fluctuations and okay, that's wrong, that's just not true anymore. I'm surprised by that, I'm surprised by that. I'm surprised by that because the index for the small cap indexes have a lot more REITs and stuff like that, more financials, which would be more US focused.

Maybe it's the industrials in the small cap stuff. It must be, it must be more industrials versus. Because you don't really have tech there in any major way. No, no. So I think the large story around parts of the market that you cover, David, are the rewritings higher. And is the market giving them too much benefit of the doubt in terms of anticipating expanding

margins from the advent of AI? Do you think it's just gone too far? For the market, thinking about it, I apologize, I was still fascinated by this chart. Maybe repeat the first part. So one of the things that we've seen in a lot of areas that you cover, because you're not just a Mac seven guy,

like you have all sorts of areas in your portfolio, a lot of these companies are getting re-rated higher in the anticipation of margin expansion from more productivity gains from AI. So, I mean, that's the story. I think some of that is, but I think some of it is just that, you know, people think the economy is gonna get better

and they wanna own things that have exposure to that. They think the consumer is gonna get better so they're willing to pay 49 times for Costco versus normally paying 35 times. But what if it's simpler than that? There's just not enough stocks. You and I come from the 1900s. There was a time, we do.

Do you remember when the Wilshire 5000 could actually fill itself with 5000 stocks? It's give or take 3500 stocks. If you pull out the SPACs and sub $500 million companies that most people can't even invest in, it's like 2000 stocks. So isn't it just as simple as there's multiple expansion because companies don't come public at the rate they used to and people still need to own equities and we've put more money than ever into these vehicles

like 401ks. And every two weeks, buy, buy, buy. I've been saying this for 12 years, people are like, no. So all right, so let me get this straight. You think like the bottom for the stock market's gonna be 10 times earnings, like it was historically? It can't.

Well, it goes back to what we talked about before, it's mix. I think if you look at the mix, those growth stocks versus history, there's no kind of like structural move upward in their multiples. It's just, they've been kind of that same kind of trading rate, that's called 25 to 35 range. So if that thesis was correct.

The stock shortage thesis, to be clear. Yeah, you would see that, you don't see it, you see more of this traditional kind of up and down pattern. Doesn't it explain though, multiple trillion dollar companies occurring at once, when before there was never such thing as a trillion dollar company? I think the trillion dollar companies are explained by the fact that trillion dollar companies have tens upon tens of billions of dollars of profits.

What's so interesting about the market, with the exception of Tesla, all those companies are trading for lower multiples today than they did five years ago. Yeah, they justified it. So I saw Conor's post this. This is the forward PE for Walmart. Yeah, yeah. Why, so it's just going straight, I know, but it's straight up.

Walmart AI. Well, I mean. I mean, the reality with Walmart is Walmart is a, has a big chunk of their business consumer discretionary. That is likely to benefit if you have a strong recovery. And this is a company that promised eight city PS growths forever and never hit it. And now they're doing 10 and the market,

it's, hey, we're willing to pay 49 times for Costco. But Costco too, why? I think it's they're massively overvalued. It's the stock shortage. I mean, now it is the stock shortage, but but but I'm gonna you're gonna walk out of here This can be no no he's walking here say sell everything this this can age so poorly Because even though like I don't want to call a stock shortage, but Josh called it the relentless bid years ago, and he's right, and this is a secular theme

It's not to say that there can't be bear markets because we've had several of them. Yeah. But there is an underpinning like if you zoom zoom zoom out like this is happening. Stocks are getting more expensive. In the 1980s nobody you knew had a 401k. It is now the predominant vehicle by which America retires. There's no more pensions, no more defined benefit. It's everything is defined contribution.

But pensions owns a lot of equities too. Right, but they are not as prevalent. Less companies are offering pensions than used to. You're just shifting from pensions to... So here it is. These are the number of millionaires at retirement accounts at Fidelity, hitting an all-time high.

So it's looking at 401Ks and IRAs. It's a million combined almost. So they all have to buy stock structurally. They have no choice. It's an all time high. So it's looking at 401Ks and IRAs. It's a million combined almost. So they all have to buy stocks structurally. They have no choice. Americans are like underwriting the American economy. Because these companies are then taking their stock and using it as currency to do all these transactions.

Actually most transactions are done with debt or cash. That doesn't fit my narrative. Sorry, sorry, sorry. I kind of want to change gears. That could be the narrative if rates stay high. I think I think we could all we could all agree that what I'm saying might be true. Or topical. But it also might not be true at all.

Treasury Secretary Scott Besson said the Trump administration's focus with regard to bringing down borrowing costs is 10 year Treasury yields rather than the Federal Reserve's benchmark short-term interest rate. This is a Bloomberg story. Quote, he and I are focused on the 10-year Treasury, Besson said on Fox Business. Quote, he is not calling for the Fed to lower rates. And then when I read that, I said, oh yeah, I haven't heard anything about Trump saying anything

to Powell on Twitter or at press conferences. Besant got in his ear and said, sir, what you really want is to bring down inflation and not worry about the short-term rate. Let's focus on bringing down the price of oil, which would take the intermediate term rate down. Some of the pressure in the system from inflation is showing up in that high 10 year.

It's ruining the housing market. Yeah. Okay. So that's the first time I think we've heard best and say something policy wise. And immediately it sounds like the smartest thing we've heard in five years from the Treasury Not a big Yellen fan. I'm putting my hand up I want to hear what your your take on that is because that's half your your half your portfolio is Is affected by those comments? Yeah, yeah, I think it's very I mean the the

Treasury yields are a function of the of the Fed funds futures over a long period of time and some kind of premium at the end, if you will. What I would say is, you know, if you really want to get the, if you really want to get the tenure down, the way to get the Fed funds down is to do what, he says, get the debt to GDP back down to three, I'm sorry, deficit GDP back to 3% by 28.

You think that's the source of the term premium? That is the source of the term premium. Okay, you're saying this emphatically. I'm saying that emphatically. Okay, interesting, tell us more. Well, I think you have a situation, well, first of all, let's go back to your supply and demand. There is a case that you were issuing

a lot more Treasuries today than we were five, 10, 15 years ago. And the demand for that is not infinite, right? And so- Seems to be. But rates are higher though, right? So the more supply you put in there, so if you could go to-

So to your point you're making, like the Fed cut overnight rates by 100 basis points and the 10 year yield rally at 100 basis points effectively offsetting that if you're a mortgage broker, you're like, wait, what just happened? I know. I know. Okay.

So continue. Well, when the Fed cuts rates, it's very frequent that the, because that is a, that is positive for future economic growth and future economic growth, you know, could be actually, it's not, it happens more than you would think where the Fed cuts rates. Not so surprising. And the 10-year actually rises. Okay. So, but like that also is a function to your point that there's enough concern about debt

and deficits that people are not buying those bonds, therefore rates are structurally higher. Yeah, I think there's a definitely a case to be made for that. Okay. In fact, they were running 1.9, you know, we felt, I remember in the Trump administration, we got to a trillion dollar deficits, we felt like that's pretty scary, right? It's kind of 4.5% of GDP. And what is it now? 5? 1.9 or 6.4. 6.4, yeah. So, you think what Besson is saying has validity, but what are we really going

to do to lower the deficit? He can't, there's nothing he can do to impact the 10-year rate beyond getting inflation under control, getting deficits under control, and probably not pushing through a whole bunch of tariffs either. Okay, so I think he's got a voice, but I don't think he's pulling the trigger

on any of those things. Yep, I agree. Yeah, okay. David, how much, you list to 130 calls a quarter, I'm sure you have a pretty good sense of how the economy is doing. How much time do you spend on looking at economic data versus just getting a painting the mosaic

through the companies you follow? Almost none, almost none. That's Peter Lynchian response. Yeah, he said if you spend 15 minutes thinking about the economy, you wasted 13 minutes. Again, it goes back to what we said earlier. The economy today is not necessarily the economy in a year from today. When the ISM is at 55, where is it likely to be one year from now on average?

52. When the ISM is at 48, where is it likely to be one year? 52. Average overtime is 52. It's just there is a mean reverting tendency to the economy. And so if you're always just, okay, the economy is great, you got to go buy industrials. It's a, there is a mean reverting tendency to the economy. And so if you're always just, okay, the economy's great, I gotta go buy industrials, that's a bad decision. When the ISM's high and the economy's strong,

you should be buying utilities. Counterintuitive, but it makes sense, right? ISM's at 47, 46, she'd be buying tech and industrials because the economy's gonna get better and it's not just gonna work really, really well. Well, at least as part of, part or not a bigger part of the explanation for the bull market over the last 15 years, along with Josh's relentless bid theory,

is there's really only been one recession outside of COVID since the GFC. Like, that was it. There's been like a few quarters here and there. There's been a lot of fear. There's been, you know, 11 there was a fear, 15 there was a fear, 18 there was a fear. You know, almost every year,, 18 there was a fear.

You know, almost every year, I think it was separate one. Well, some would say there have been industry recessions. There have been. Energy, for tech. Tech, entertainment. Some would say there have been rolling recessions and some of them are regional. Like whatever went on in 15, 16 with oil prices,

if you lived in Oklahoma, it was a recession for you. It was, it was. Okay, so maybe that's just now a standard thing where not every recession goes nationwide or maybe that's not really a recession. Yeah, I agree with that. And I think it's also, we become more of a source economy. I think there's only been one year in like the last 70 where services went negative, right? And so if you have an environment where it used to be 60% of the economy was services,

and now services are 72 or 73% of the economy, the odds of a recession, because that other quarter of the economy that is more volatile, housing, manufacturing, aerospace and defense, right? That stuff, it's just become a small part of the base. So the risk of recession goes lower over time. Do you know the smartest people that we've had on the show

are all saying some version of what you just said, and I include you in that group, but like Dr. David Kelly was talking about, we're asking like, what's the landing? Soft landing, hard landing, no landing, and by the way, I'm not 100% convinced that we're not in a post-cycle economy. Rick Reader said this.

Rick Reader gave us another version on that, which is in the old days, if they jacked weights up 500 basis points, the manufacturer couldn't borrow money from the bank anymore, which meant inventories would sit there and they would start cutting employees. Name one company, name one version of that that would offset the growth from Apple, Google. None of these companies. And how about this, the transmission mechanism that caused the recession. The borrowing.

The information that these management companies have happened so much quicker today than it did back then. Think about how the tech companies responded in 2022. They all got religion real quick. They did. So do you buy the fact that managers are now better, I mean I know this sounds so f***ing toppy, but that management teams are just better equipped

to handle risks. No, you need a risk. A misogynist shock, in other words. Like a run in the mill cyclical recession becomes harder to imagine. It is, and it's funny, we think about all these, since World War II we've been in recession like 11% of the time.

Since 1982 we've been in recession like 8% of the time. Recessions are rare. As it is. Just even without any other, it's a rare event. Yeah. And again, I would argue that for a lot of reasons, the mix of the economy, recession's become more rare over time.

All right, so are you sure about the 5% number? You want to ratchet that higher? It's actually below 5% now. So I want to get to a couple of things before we finish up here. I've always wondered this. All right, so you guys have this longstanding, incredible track record on the Capital Appreciation Fund.

And then somebody internally at T-Row is like, we've got to get with the CTF thing. This is just how advisors want to allocate. It's how retail investors want, they want daily liquidity. There's tax loss benefit. So we have to take these active strategies and we have to reclassify or create a share class or we'll do something, but we must do the ETF wrapper.

I've always wondered how a portfolio manager feels because now all of a sudden, instead of you having 45 days after the end of the quarter to file a 13F and reveal to Wall Street, this is everything we've been buying, this is what we've been selling, now it's like every day, people can go to the website, spreadsheet, here's our trades for the day.

Does it matter? Does it matter a lot, does it matter a little? Well, the good thing is the cap appreciation strategy, again, it's a balanced strategy, it has fixed income, equities, liberal recons for the equity side. The ETF is all stocks. And it's a larger number of names.

And again, for tax purposes, the ETF trades less frequently too. Of course. So we are not disadvantaging our cash shareholders by having that. But was that a conversation internally? Yeah, it was. I told people I would not do anything

that was not a disruptive product, that had a clear value proposition, and that in any way hurt our existing CAF shareholders. We wouldn't do any of those things. But you're late, which means there was a hesitancy for a long time. Well, yeah. Because you could have done this 12 years ago.

The reality, the reason we didn't do it 12 years ago was because Tiro got too big. Yeah. And there were allocation issues at one point and we split into two pieces, which made liquidity and allocation so you can get on all the companies you want and the size you want.

So instead of being at a one, you said a $1.6 trillion asset manager, I don't, you know, even though that's zero price, I'm at an asset manager with under $200 billion. Okay. At, you know, around $200 billion at Terpum, so I went with the smaller entity. So we couldn't have done TCAF

if I had stated Terpum from my perspective. Okay. Because I wouldn't have been able to own, I would be taking capacity that my cash share owners had the first right to. Now there's plenty of capacity because I'm the only large cap strategy. Oh, that's interesting. So now, all right, so now, but so now you don't feel like people are front running the fund, knowing what you're actively buying and selling each day.

Because everyone's do, now everyone's out in the open, all the active funds are ETFs or becoming ETFs. And we're, and I said, we're not, we're not trading every day in TCAF. Again, you can't trade every day in a ETF and still have the tax. There are a lot of advantages to an ETF that you can do things with, but there's not an infinite number of things.

You can't trade every day and generate, and we've had no taxable gains and we'll never have a capital gain, but if we tried to trade every day day in TCAP, we would. So if somebody asks you, has your portfolio management style changed since putting the strategy that you've been running for a long time into the ETF wrapper, you can confidently say, other than the fact that it's all equities, no, like this is what we do. I love that.

I love that. Larger number of names with slightly different objectives, no fixed income and, you know, again, an objective not having capital gains. So let's talk stocks. And in Baron's piece, you had some of your favorites. I know a couple of these. I don't know, Revity. You'll tell me about it. Sure.

Let's start. Let's start there. RVTY. It's a hundred and thirteen3 stock as of the start of the year. What is it? Is it Garpe? Is it value? It's a Garpe stock. It is a life science tool and diagnostic company headquartered outside of in Massachusetts.

It is a company that sold off its industrial and a lot of its applied businesses a couple of years ago and really became a software, reagent, immunodiagnostics play. 75% of the business today in terms of profits come from businesses that are basically growing either high school digits or low double digits. And the rest of the business is fine,

probably let's call it three to 4% kind of growth, but they have a lot of margin room. Margins are like 28, 29, but they should be over time 35. They've been buying back a lot of stock. There's some optionality around some of the things they're doing with their, with their royalty business, if you will. So there's a lot of really good things.

There's a great CEO, and I think this is the company that will probably grow earnings from here. So you see yourself being in the story for a long time. I do, I think this is a $300 stock. So you have, we'll do one more. Oh wow, it's 120.. So we'll do one more. Oh wow, it's $120. Yeah. We'll do one more. I'll let you pick.

You've got PTC, Fordive, Roper Technologies, Becht and Dickinson, Thermo Fisher. Those last two, are they basically the same company? No, they're definitely not the same company. But they're like medical devices, medical... Well, Thermo Fisher is twice the price, so it's twice as good? Twice as good, yeah. That's how it works.

Maybe today it is. No, but Thermo is a life science tool company like Revity is. And Becht and Dickinson has some lifetimes tools, but it also has syringes, kind of core medical devices. Is Roper like water? Roper does not water. Roper is, it's a big stock. It's niche software businesses.

Small, nichey software. Like a constellation software? Yes, but faster growth. Better, but better. Better businesses. Look at this stock. Yeah, it looks like one that I should own. It's crazy, right?

This stock's on my list of best stocks in the market almost all the time. So you've been overweight healthcare, and healthcare's been really, I mean it's've been overweight healthcare, and healthcare has been really, I mean it's only been one thing, but healthcare has been working. This year, this year. This year it has been working, that's true.

It did not work last year. But again, I think, again, in an expensive market, people are starting to say, okay, banks, can I buy Goldman at two times book value? Can I buy Costco at 49? Everything's picked over. Well, maybe not everything in healthcare is not picked over, right?

You know, some of those life science tools, some of the managed care, some of the some good opportunities. Abbott has had a good run, which we own a lot of. So, you know, there is- You like healthcare for the coming year. We like healthcare, again, it's defensive. And again-

You guys look sector, like top down sectors, or not really. Not really. You're looking for individual situations. Individual situations. So we have a larger weight in healthcare, but it's not because we like healthcare, it's because we like McKesson.

We like, we like Revity, we like Thermo, right? Don't say United Health, I can't protect you here. Other than John, none of us are packing. So David, you've got. I do like UnitedHealthcare. Four of your top ten holdings are our Mag-7. It's such an interesting top ten. I just want to read it so the audience gets a taste of what this is.

Microsoft, Amazon, Begden Dickinson, Nvidia, Roper, Fordiv, UnitedHealth, Revity, Alphabet, PTC. I don't see too many portfolios that look like this. Well, that's maybe why we've outperformed so much over time. You're one of a kind. Well, you're not afraid to buy the glamour stocks, and they're working. You've done really well with those names. I mean, I always think about it relative to the bet size, right? So if you look at a roper, on our equities, we would be 400 basis points overweight a roper.

Because nobody owns that. It's like not big in any index really. No, no, but it's a company that will compound earnings at a low double-digit rate. Trading, again, it's trading, it's had a nice route at the bottom from 513 to 580. But when we were pitching, it was almost 20 times free cash, which is crazy.

Is that in the software sector? It is, they got moved to the software sector when they sold their industrial assets Because that's why I thought it was a water company You know it has a water meter business, right? But it doesn't it does it's not yeah, it doesn't have what it trades on it has a Neptune which does water meters So you're wildly underweight Apple. It's outside your top 10. It is I would imagine that that's it That's the perfect type of stock where you look at it And you just don't understand why the multiple just keeps going up and up and up.

Yeah, I think it is. Well, I understand why the multiples goes up because the mix keeps evolving to more services. And services is higher margin, more recurring revenue. So that is, I understand why the multiple is expanding from that perspective. The issue I don't think, I don't understand why people aren't more focused on the idea that, you know,

the iPhone really doesn't really grow very much. It hasn't grown in the last three years, last two years. It's replacement only now. It's replacement only. Yeah. And, you know, I'm a little bit skeptical about Apple AI. I mean, the early indications are that's not good. I'm not sure it's gonna drive a usual replacement cycle.

Oh, it's chat GPT with an Apple wrapper. The goggles were a misfire. There's a long list of reasons why Apple shouldn't have done as well as it has done. And I'm long, I'm a shareholder. Most of the world is at this point, whether they know it or not. It's an interesting stock. Amazon's reporting as we, Amazon will report just as we're wrapping up the show. Is that in your?

It is. Yeah, it is. It's not as big a bet as Microsoft is per se, but it's a name that we do own. They're going to have the second highest earnings growth of the top 75 market caps in the S&P. Did you know that this year? I did not know that. This is Sean and Chart Kid Matt did this work for me today. Amazon will have the second highest

earnings growth of the Mag-7. Oh, yeah, yeah. And the second highest of the entire large cap 75, 77% earnings growth expected for this year. Oh, interesting, interesting. Company could not grow post pandemic. Made a lot of... Went backwards, went backwards. Went backwards. Anyway, that's one of my favorite names over the last year. And... It's done well. It's done well and I think Jassy now is getting into that place where he's like,

oosh, Andy Jassy speaking. Like I think people are starting to venerate his abilities finally. It took a minute, but I think that's where we are with that name. Yep. So, and as you could tell, it's a very tangible thing that I'm citing.

Did you have fun on the show today? I did, I had a lot of fun. A lot of fun, thank you. All right, do you want to come back sometime? Absolutely. What are you doing tomorrow? We'll all be here. David, this has been such a pleasure.

I've been reading your commentary for a great many years, and I've always wanted to talk to you, so I just want to, before we wrap up, I just wanted to say thank you so much for doing this. The wrap up is we ask people what's the thing they're most looking forward to in the future. And it could be literally anything, professional, personal. I look forward to seeing my wife tonight. There we go.

Alright. Wow, very nice. Family man. I like it. You got anything you're looking forward to? I'm looking forward to Amazon earnings in four minutes and White Lotus season three. White Lotus season three.

Hey, put this graphic on screen for me. I just bought tickets to this. This is what I'm looking forward to. This was one of these things where as soon as I saw it, I just pulled the trigger and then I asked people later, like, where you go? Bob Dylan and Willie Nelson together, five minutes from my house.

They're gonna hit amphitheaters all over the country. This is Jones Beach. Not all of these acts go with them. Like, depending on what city they're in. So we're gonna get Wilco at mine, which is one of my favorite bands. But they have Sheryl Crow, Aved Brothers, Red Clay Strays, like a lot of really great acts depending on where you

see them in America this summer. But I would just recommend to music fans, every time you see Willie Nelson and Bob Dylan, it could be the last time. So if they're both on stage at an amphitheater near you, I highly recommend you buy tickets today. It's called the Outlaw Music Festival. All right. That's it from us. We're going to wrap up. I want to thank our special guest, David Gero. Are you doing any social media or not really? You stay off of that stuff. I stay off social media. Can people go to T-Row Price and hear more about the fund? What's the best place for people to do that? T-Row Price.com. How simple could it be? T-Row Price.com. Great job this week, everyone on the Compound staff. Too many of you to name at the end of each show, but we appreciate you.

Thank you so much to the fans. Please remember to subscribe, tell your friends. We'll talk to you soon. Music